Americans Will Be Refinanced by Any Means Possible

Homebuilders were flying on Friday - that was my pick for stealth bull market sector for 2009 in my 2009 Outlier Predictions [Dec 16, 2008: 13 Outlier 2009 Predictions] - and why should they not be when we are going to give away homes for (near) free?


Sometimes as I read these stories I feel like I am reading a piece of fiction. What we are doing simply cannot be true. I cannot wrap my mind around all the potential unintended consequences we are going to be creating with this smorgasbord of proposals.

My mind almost imploded when I read this one in December [Dec 11: Fannie, Freddie Consider Waiving Appraisals for Refinancings]

I wrote that 2009 will bring us "innovations" and "interventions" like nothing before (with Fannie and Freddie as the centerpiece of the toolbox),so I guess I should not be surprised by this proposal. That said, my jaw hit the floor when I read it. I hit refresh a few times - checked the calendar (nope, not April 1st) - certainly this must be a hoax.

So get ready for this; no matter what your home appraises for - if it falls 10%, 20%, or 30% below purchase price, and you are underwater - you can STILL refinance under the latest proposal being floated at the full original mortgage value. Imagine a nation of people whose value of home when bought was $280K and now its $180K (as it would be appraised), but instead of being underwater $100K (i.e. out on the street when unable to refinance) the generosity of government gives the full $280K at a lower rate - 4.5% of course as part of the Treasury plan being floated. So you see where this is heading - a nation full of phony mortgage values (set by government) at a phony rate (set by government). Hello USSAR.

And the hits keep coming - check out the credit scores below in this story from Bloomberg:

"Fannie Mae to Loosen Rules for Home-Loan Refinancing". As you do please realize that in the mortgages we've been modifying in 2008 the delinquent rate is already OVER 50%!!! in under 6 months! [Dec 8: More than Half of Homeowners with Modified Loans are Back in Trouble] Not 1 year later, not 5 years later. In 6 months! And that's before the teeth of the recession set in during the late portion of 2008. As people lose jobs in increasing manner, the default rate will only increase - we are throwing money down a black hole and simply creating more burden upon burden on "someone" who eventually has to pay.

• Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing. Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases. (THAT'S WHAT GOT US HERE IN THE FIRST PLACE!!!)
• The company, which accounts for more than 40 percent of the $12 trillion in U.S. residential mortgage debt, is seeking to break a “logjam” in refinancing and allow more homeowners to take advantage of near-record low interest rates. The program “will streamline” refinancing “for potentially millions of current mortgage holders,” he said.
• .... Fannie Mae, smaller rival Freddie Mac and the companies’ regulator are considering permitting borrowers to refinance even when the consumers owe more than their homes’ worth...
• Fannie Mae’s changes will include allowing borrowers... to qualify for refinancing with credit scores below its 580 minimum. (Below 580?? I mean, it would take EFFORT to bring your score that low! A lot of EFFORT!)

I give up.

[April 13, 2008: Unintended Consequences of the Coming Socialization of the Housing Market]

Comments

[Dana H.]

I agree, it's friggin' insane. And they say Atlas Shrugged is fiction.

2009 Feb 09 08:38 AM

[Machiavelli999]

More moralizing, more self-righteousness. I am really tired of Seeking Alpha featuring these pseudo-Austrian economists.

In a contraction environment, loose money is the proper policy response. Strict money and tightening of lending standards would have made sense 3 years ago, but the very same people who are now writing articles criticizing the government for what its doing now, would have been criticizing it 3 years ago if it stopped in and began to heavily regulate the finance industry.

The sad thing is I don't even think what we are doing is even enough. We need much more spending and much more easy money. The proof will be the deflation that is about to be set upon us. But I am going to enjoy seeing the Austrians trying to explain deflation and persistent dollar strength over the next 10 years.

2009 Feb 09 08:45 AM

[fatcat]

I'm with Trader...I've been trying to think what this means to housing values...my only conclusion is that the FED is assuming 10% or more inflation for the next 3-5 years.

What else would make this hairbrain scheme work?

2009 Feb 09 08:47 AM

[nova]

Speaking about lending:
Are there any incentives to lend money if there is no even a prayer (with US government and legal system help) of being paid back?

Paying debts:
Are there any incentives to pay your debts if (with US government and legal system help) the debts will be reduced or forgiven without any adverse consequences?

If answers to the both questions are "NO", what is Obama & Congress secret plan?

What am I missing?
======================...

The old Soviet joke:
They (the government) pretend they are paying us and we (workers) pretend we are working.

The Fact:
There is no Soviet Union any more...

2009 Feb 09 02:04 PM

[Alan Young]

Wacky, inflated appraisals were the main driver of the housing bubble; phony mortgages were the enabler. Obviously we need more of both to, um, undo the damage, right?

Good news for people who own houses. But for people who might want to buy, the window of affordability is about to slam shut as prices go chasing the "bargain" interest rates. As for the impact on the banking industry, I can't even begin to figure it.

2009 Feb 09 02:31 PM

[John Polomny]

You have to define terms properly first chief. Inflation is an increase in money and credit. It is quite possible to have an economy that contracts and where prices actually go up. As far as prices going down over time thats what would happen if the government and FED were not constantly meddling in the economy. That is called productivity. You call for more spending and more money creation. Please inform us where in history this policy has led to sustained prosperity.



On Feb 09 08:45 AM Machiavelli999 wrote:

> More moralizing, more self-righteousness. I am really tired of Seeking
> Alpha featuring these pseudo-Austrian economists.
>
> In a contraction environment, loose money is the proper policy response.
> Strict money and tightening of lending standards would have made
> sense 3 years ago, but the very same people who are now writing articles
> criticizing the government for what its doing now, would have been
> criticizing it 3 years ago if it stopped in and began to heavily
> regulate the finance industry.
>
> The sad thing is I don't even think what we are doing is even enough.
> We need much more spending and much more easy money. The proof will
> be the deflation that is about to be set upon us. But I am going
> to enjoy seeing the Austrians trying to explain deflation and persistent
> dollar strength over the next 10 years.

2009 Feb 09 04:07 PM

[CJMath]

This is a disgrace. Asset deflation can't be prevented, only postponed. And postponing it only drags out the difficulty... Atlas Shurgged indeed.

2009 Feb 09 07:34 PM

[CJJ]

I love how you all think you are the "answer". Its like a cult. What are you answers to poverty, crime, drugs...Really enlighten us all.

A few taglines:
Austrian Economics...Do nothing and everything will be alright
Austrian Economics...We'll bring upon the New Dark Ages and We'll Blame You for It
Austrian Economics...Often Talked About, Never Tried
Austrian Economics...Twinkie and Roach Backed Currency since 2010

2009 Feb 09 09:53 PM

[Mr. Ed, Jr.]

So, here's the plan to get us out of this:

Low interest loans on over-valued homes....made to people with sub-prime credit.

I can't imagine what could possibly go wrong.

2009 Feb 10 01:41 AM

[markg]

If our economy is driven by consumer spending, and the funds to spend as consumers via home equity is no longer an option, then why do we not simply strive to stimulate the economy through wealth creation by doing something constructive instead of trying to resurrect a clearly defective economic plan. House values should be seen as a result, not a cause.

As Wall street has created and paid themselves billions for shuffling paper with no real value added, homeowners have spent without regard for the value added proposition.

Almost all of these "schemes" to stimulate housing, save housing values, etc. are put forth with the goal of stimulating the economy. It would be much more effective to simply go back to being an economy where we ad value through productivity and working intelligently, not paper shuffling.

2009 Feb 10 02:30 AM

[Joe Adamaitis]

Bottom-line that everyone forgets is that the same guys getting the bailout money are the ones slamming the doors on those trying to get out!

'Excuse me Mr. Borrower, we have a program you can't beat. Pay option arms, No Doc No Job, No Problems, 500 credit, No Problem. Now the borrowers are in deep do dah and getting hammered with no help. Where are the same guys who sent wholesale reps with huge expense accounts out into the streets to train loan officers, and in the case of World Savings, even financial planners and accountants simply to pass themselves off as 'Financial Planners aka Financial Guru's.

Anyone who could sell their 'Pic a Pay' deal as a financial instrument and this without any licensing from the Securities folks! (check around the states and you will find there is a little smoke right now)

So where are they now???? Sorry, we can't do a short sale that has a second mortgage! Sorry we can't do a modification because you don't qualify! Sorry we can't do anything for you! Yes, I agree we need to stop all this, but we need to solve the issues we have now. As I have said over and over, all these banks who had subsidiaries and all these Wall St firms who owned Non-bank (sub-primers ie Lehman- Morgan-Goldman) are now getting bailed out and none o fthe monies are being used to get us out of the mess THEY CREATED!!! They literally and singlehandedly took down the mortgage and real estate industry!! Sorry, I say fix the problem with the monies they get then tighten. People will have learned and things will go back to normal. JMHO!

2009 Feb 10 08:27 AM

[auto44]

markg is one of the very few people who has hit the nail on the head. Housing prices are not the cause of the problem, they are a symptom or the result of lending money to folks who couldn't pay it back. We are now going to compound the problem by doing it all over again. At least the last time the construction trades got a pay check out of it. Who is going to get a paycheck this time?

2009 Feb 10 10:27 AM

[mallarde]

Yes, markg. The paper shuffling could work for so long, just like a Ponzi scheme. Now one of these economic luminaries that the government listens to must explain that Americans need to earn money before they can spend anymore.

2009 Feb 10 01:31 PM

[User 135971]

If any of you actually knew the details - you know the devil is always in the details. You would see that the actual proposal isn't going to impact much of anything. See Fannie Mae already knows the property and borrower history. If the borrower hasn't been paying - they're already in some trouble. The only time they'll ignore an appraisal is for property's they already know and have a really good sense of the value.

Fannie Mae has technology (hence the delay of when it will be available) that will only cherry pick the best deals to qualify. Which will still require the borrower to qualify and document income and employment. If the borrower and property are not known, they won't approve the deal.

2009 Feb 10 01:44 PM

[TraderMark]

sorry to question Fannie Mae's technology and judgement but last I checked they were taken over by the government. Good businesses who have good judgement usually don't have that need.

The reality is we've slowly but surely been shipping off "productive" work and transformed to a "shopping" economy. With median wages stagnating. We hid behind house appreciation (via Easy Money Al) for half a decade. Then the end game is happening.

To forestall end game, we try to do the same thing that got us here.

Those who do not learn from history....

There is no magic bullet nor easy solution. It's going to take time, and pain.

As bad as it sounds for current homeowners (myself included) it would be better for everyone if houses were much lower in price and only took a small portion of monthly income stream. Then we could do crazy things like save.

2009 Feb 10 02:33 PM

[derryl]

I think they're trying to prop up real estate values because MBS are one of the main pillars of the megatrillion dollar and extremely leveraged international derivatives industry. Lehman leveraged at 30:1. Some European investment banks were as much as 50:1 At 30:1 a 4% writedown in the value of the underlying asset (a house) leaves your asset 20% short of covering its attached liability, and when assets can't cover liabilities you are bankrupt.

Have you noticed that nobody's talking about asset value-to-debt reconciliation in derivatives? That is, mark-to-market in derivatives? Wall St sold these investments to the world which couldn't get enough of them. Who would have thought that a drop in the value of your mortgaged American house could threaten to collapse the global financial system? But knowing this at least helps make sense of these apparently ludicrous moves to prop up real estate values.

2009 Feb 10 10:22 PM

[mallarde]

derryl, who cares if the rest of the world chokes on the derivatives they bought. I would prefer to allow Wall Street firms to suffer their own extinction, allow new players to enter the field and let foreign firms die, too. They took on the huge risk. They deserve it.

Why move mountains -- or continents, or planets -- to save these firms? Allow new firms to enter their space. Middle-tier investment banks can replace the old names. Isn't this the "creative destruction" these same capitalists love the talk about?

Maybe the government should be subsidizing healthy, smaller firms so they can replace the ones that got drunk on derivatives.

2009 Feb 10 11:16 PM